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CTA: Beneficial Ownership Must be Disclosed

The Corporate Transparency Act (CTA) is here, having gone into effect on January 1, 2024. You need to know your responsibility to file a report with the intimidating sounding name of the Department of Treasury Financial Crimes Enforcement Network (FinCEN). The CTA will require over 30 million businesses in the United States to file a report with FinCEN. This article highlights some of the major aspects of the law. If you have any questions, you should contact your small business lawyer.

Related article: Small Businesses Required to Disclose Ownership: Corporate Transparency Act

Small businesses required to report beneficial ownership

The CTA generally applies only to small businesses. Under CTA, small businesses, which are companies with 20 or fewer employees, are “reporting companies” required to report beneficial ownership.

You would generally think that government has stricter regulations for larger businesses than for smaller businesses. Many labor regulations only apply to businesses with over a threshold number of employees. For example, the Americans with Disabilities Act applies to all employers with 15 or more employees. The Family and Medical Leave Act (FMLA) applies to private sector employers with 50 or more employees.

CTA is exactly the opposite, applying to businesses with 20 or fewer employees. Unless you meet one of the exemptions, you are required to file Beneficial Ownership Information (BOI) with FinCEN.

Exempt companies are not required to file BOI

If you meet one of the 23 exemptions, your business does not qualify as a “reporting company” and you are not required to file BOI. One of the largest exemptions will be large operating companies.

If you operate in the United States and have more than 20 employees, you have an operating presence in the United States, and your business generated more than $5 million in gross receipts, you are exempt from the BOI filing requirements.

There are other exemptions. The other major exemption is for nonprofit organizations exempt from taxation under 501(c) of the Internal Revenue Code.

Inactive companies are also exempt. If the business is not owned by a foreigner, has not transacted business since January 1, 2020 and has no assets, then it is not required to file BOI.

The vast majority of small businesses, estimated to be about 30 million strong, will be required to file BOI.

Beneficial ownership information that must be provided under Corporate Transparency Act

Once you know that your business has to file a report, the actual form reporting companies are required to complete should not take long to complete. These beneficial owner reports include identifying each “beneficial owner” and “company applicant.”

Probably the most difficult task will be to identify “beneficial owners” of the business. Beneficial owners will need to upload a governmental identification document.

There are many third-party providers that assist in facilitating the process. We are working with one provider that allows us to monitor compliance of our clients.

Beneficial owners do not need to hold an ownership interest in the reporting company

The major point of the CTA is the requirement to disclose beneficial ownership of small businesses. The reporting company must identify beneficial ownership, but the trick is who qualifies as a beneficial owner under the CTA. There has to be at least one beneficial owner per company.

For most small businesses, it will be a relatively easy exercise to identify who are beneficial owners under the definition of the CTA and FinCEN guidance.

Any individual who owns or controls at least 25 percent of a company is considered a beneficial owner. For most businesses, that will be relatively easy to determine. If you own 25 percent of the membership interests in an LLC or 25 percent of the voting stock in a corporation, you must be identified as a beneficial owner.

Even if you don’t own any interest in a business, you may still be considered a “beneficial owner” under the CTA definition if you have “substantial control” over the business.

The Department of Treasury has issued regulations on the CTA, which essentially say that if you are a senior officer such as president, CEO or COO or you have authority to appoint or remove a senior officer, you have substantial control.

If you are an important decision-maker and have substantial influence over important decisions, you similarly are considered a beneficial owner. For example, board members in a corporation or managers in a limited liability company exercise substantial control and are therefore “beneficial owners.”

Those who are involved in registering the company must be disclosed

The reporting company also needs to identify the “company applicant” and provide their information to FinCEN in the BOI. T

This requirement is only for reporting companies organized after January 1, 2024.

There are two categories of company applicants under the CTA. The first category is the “direct filer.” This is the individual who directly filed the document that created the reporting company.

The second category of company applicants are those who directs or controls the filing action. This is the individual such as the corporate attorney who was primarily responsible for directing or controlling the filing of the registration document.

Deadlines for filing BOI strict

This is the big issue. If you are required to file, there is a two-tier system.

For reporting companies organized before January 1, 2024, they have one year until January 1, 2025, to file.

For new companies organized after January 1, 2024, during 2024, you have 90 days to file the initial report, and after January 1, 2024, you will have 30 days to file.

Updates and renewals

Updating BOI will be the biggest headache of the Corporate Transparency Act. A reporting company must file an amended report if any information for the beneficial owners changes, and you only have thirty days from the event giving rise to the changed circumstances to file the amended BOI.

Let’s say that there are three members of the board, and three separate officers of a reporting company. That would mean that if there is a change on the board or in the corporate officers, or if any of these beneficial owners moves, or if their identifying information expires (such as a driver’s license), then an amended report needs to be filed.

Penalties for failure to comply are severe

Make sure you know the requirements for your small business to comply with the Corporate Transparency Act.

The penalties can be severe if you do not comply: up to $500 for each day a reporting violation occurs. If you willfully file false information or willfully fail to file information required to be filed, you may be fined up to $10,000 or imprisoned for not more than two years, and if you are really unlucky, both the fine and prison.

The requirements of the new Corporate Transparency Act should not be taken lightly.